What is a MLM Business and What You Need to Know About Them

As you’re doing your research you may run across some amazing claims by potential business operations that promise you the ability to work for yourself while selling great products.

The old mantra of “if it is too good to be true, it probably is” should raise a red flag in your head.

When an individual or business claims they’re going to make everyone rich and successful, you are probably speaking to someone involved in an MLM business scam.

What is a MLM Business?

MLM stands for “multi-level marketing”.

In an MLM business the business owner (usually called a distributor) is compensated not only with commission on their own sales, but also on the sales of people they recruit “down line”.

For example, I start a diet video program MLM business. I sell videos for $50 and earn a $10 commission for each sale. However, I also earn $5 in commission for every sale that a person I recruit to the business makes. I could sell one video and make $10, or recruit one person to sell two videos and earn the same commission.

In some MLM businesses there are more than one tier below you — that is, you get commission for the sales of people who were recruited by the people you recruited.

MLM businesses are often pitched as direct sales or network marketing businesses. The former because you are direct selling the product and the latter because it helps to have a massive network to recruit to join in on the business (earning you more commission).

What You Need to Know About Multi-Level Marketing

An MLM business is set up as a pyramid where one person has distributors underneath him.

All in all, this leads to the MLM distributor making grandiose claims about the product and the ability to work for yourself through the business to get you interested.

Instead of focusing on just the product, the MLM distributor wants you to buy the product and become a distributor. You will usually be invited to come to a conference at a local hotel where the higher level distributors (sometimes called diamonds) come in to pitch the product and get everyone emotionally excited about where this magnificent new business can take them.

Difficult to Track or Verify Claims

Another thing with MLM schemes is it will be difficult if not impossible to verify some of the claims made by whoever is trying to sell you into becoming a distributor. The sales chain and how profits are generated is difficult to understand.

Contrast that with a real business distributor relationship where it is pretty basic to see how you generate profits. Sell X products at Y profit, earn Z income. Sell more of X, make more Z.

Instead, MLM believers like to make claims about how much money they’re making, but they will never verify the claims. When you start to break down the math on how much product they would have to be selling in order to hit that income, it quickly becomes apparent that isn’t happening.

Distributors are Users

Many times the MLM business will require their distributors to purchase a certain amount of product themselves. It can be used as designed or used as freebies to give away to potential recruits — but you’re still spending your hard earned money in order to promote the business. (And in the meantime, not generating any profit from the business while you “ramp up”.)

Contrast that to a real business that doesn’t necessarily care if you use the product or not, and won’t require you to buy a certain amount every month or year. They just want you to sell their product as much as possible.

Are All MLM Businesses a Scam?

This is always tough because you don’t want to paint with such a wide brush to not allow any exceptions.

However, if the business is all about recruiting more people to be in the business… you’re probably looking at a scam. Sure, there may be some small profit to be made selling to end users, but any time there is a recruitment aspect to the business I get wary.

Even some of the popular “work from home” or “work for yourself” businesses are under fire. There are quite a few popular MLMs that ex-distributors and bloggers have started writing about to expose the truth. Pink Truth talks about Mary Kay, and Lazy Man and Money has taken on several MLMs including Protandim.

Final Thoughts

Keep your wits about you.

If something sounds too good to be true, it probably is. Ask someone pitching you an MLM to verify the claims they are making; never take anyone in business at their word.

And if you are required to buy a certain amount of product each month or recruit more distributors to the business… I would recommend finding something else to do with your time.

Have you ever dealt with a MLM? How was your experience?

About Kevin Mulligan

Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He's building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, ING Direct, and many others.

I have looked at about 50-60 MLM companies and I haven’t found one yet that looks to be a legitimate business. I think that maybe Pampered Chef could be, but I haven’t really put any time into that one.

While there are certainly some turning out 6 figure incomes a look at publicly available income disclosure statements for everyone that I’ve seen has shown that over 99% of people lose money.

It would be like suggesting that because the lottery has turned out many millionaires, one is best served by buying lottery tickets. Such analysis fails to look at the total picture.

Multi-Level Marketing is the proper, accepted name for marketing on which commissions are paid on multiple levels. Referral marketing is not the proper name because it does not accurately depict the multiple levels of commissions. Referral marketing implies more an affiliate commission structure and no income from recruiting or downlines.

I’ve been invited by two people to join MLM businesses. I tried to explain to the first one that she was involved in a legal pyramid scheme, but once you’re sucked in, it’s like you’re brainwashed. When the second person came along, I didn’t even bother trying to talk him out of it. I wrote a post about MLMs back in June and came to the same conclusions that you did.

First of all, this reminds me of that episode of the Office where Michael wants everyone to start selling phone plans — did you see that? Also, many “lady” companies are MLM — they call them “direct sales” companies because they don’t like the connotation of pyramid schemes. 🙂 Third, can I interest you in Amway?

I absolutely agree you have to be careful when evaluating an MLM. Unfortunately, there are probably more bad apples than good ones. It’s tricky to know whether or not it’s a legal MLM or a pyramid scheme because they can be very similar. I understand pyramid schemes to simply be an exchange of money. There is no real product that’s being sold, or at least not one that’s reasonably priced. I’ve also learned it’s proven that pyramid’s schemes can’t survive long-term because the model doesn’t sustain itself. I’ve had a few experiences with MLM’s and will wrap up by saying it’s not a model for everyone.

Thanks for spreading some awareness about this. You get all the sane personal finance commenters here and I get all the brainwashed MLM distributors on my site. The contrast is amazing.

Kathleen, you are right about the “direct sales” thing. They use it because MLM has the well-deserved bad connotation with pyramid schemes. I try to explain to people that true direct selling would be something like Ebay… there’s no inherent multi-level commissions implied by the term “direct sales.” It almost reminds of calling an illegal dog fight a “recreational gaming event.” It may be true, but is far from an accurate description.

MonaVie, one MLM, has started to soften it even more referring to their MLM as “community commerce.”

Jason – I think you have to be more than careful in evaluating an MLM. I’ve researched around 50 and 60 and each and every one of them have turned out to be bad. Maybe one like Pampered Chef might be good, but I haven’t looked into enough. A more accurate statement would be that MLMs are like prisoners, there are some guilty people and some innocent ones. Also, there are some winning lottery tickets and some losing ones. I think you get the point.

MLMs that are pyramid schemes can last a long time due to the fact that the really high churn rate in MLM. With anywhere from 60-90% of people dropping out each year because they aren’t making money, it doesn’t explode exponentially like most would expect. A California court ruled that in 2009 that HerbaLife should be tried for being a pyramid
scheme and it’s been around for some 30 years –http://www.rickross.com/reference/herbalife/DocketOrderSJM.pdf (PDF). There’s also Bernie Madoff’s scheme that went for 17 years and would have gone on a lot longer if not for the bank collapse that lead to everyone asking for their money at the same time.

Saying that MLM is not for everyone is like saying that the odds of winning the lottery might not be the best (sorry for the second lottery analogy)… it is an extreme understatement. With over 99% of people losing money and the questionable, at best, legality, it is hard to make a case that it is for ANYONE.

I’ve found that only people in MLMs who make money by recruiting others into MLMs say, “it’s not for everyone.”

(Ummm, sorry FFB gotta remain anonymous because I give out income information and such on my site. Plus I’ve been going as Lazy Man for years now.)

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